Real Economic Growth Versus Fiscal Drag: Evenly Matched, For Now
“As you are aware,” Federal Reserve Bank of New York President William Dudley said in a speech at the Fordham University Graduate School of Business on Monday, “at last week’s FOMC meeting we made no changes to our monetary policy. In particular, the Committee decided to continue to purchase long-term Treasury securities and agency mortgage-backed securities at a monthly pace of $45 billion and $40 billion, respectively.”
This news, announced Wednesday at the conclusion of a two-day policy meeting, came as a surprise to the markets. In the weeks heading into the meeting, many economists and traders had settled on the idea that the Fed would decide to taper assets purchases at least a little bit — estimates generally came in a range between $5 billion and $15 billion per month — and the markets began to price in such a policy change. Interest rates climbed a full percentage point between May and September, and equities experienced two fairly violent “taper tantrums,” one in June and one in August.
Now that the great non-event has had time to settle over the markets — the yield on the 10-year Treasury came down about 0.2 percentage points and equities soared to fresh all-time highs in the wake of the announcement — investors appear to be revisiting their economic expectations.